We think you can safely put GE in the too big to fail category, and if you thought that saving Citigroup (C) was going to be tough, GE will be a nightmare. But the talk of how much government support the AAA-rated company might need has already begun;

WSJ: Unlike banks, GE Capital doesn't disclose a Tier 1 ratio. Large banks are in the region of 9%. To get to that level, GE Capital might need as much as an extra $25 billion of capital, estimates Richard Hofmann at CreditSights.

Normally, GE would be able to fill any capital hole with equity raised from private investors. But turning to them in the current turmoil looks tough.

Therefore, should the need arise, the government might be persuaded to inject capital, especially since GE securities are so widely held. That wouldn't be straightforward, however, because bank regulators don't have formal oversight of the vast majority of GE Capital's business.

Theoretically, the unit could be spun off as a stand-alone bank-holding company. One potential problem: An independent GE Capital might need a lot more equity to convince investors that it can make it comfortably through the cycle.

The idea of the U.S. government owning a stake in any part of GE might seem outlandish. But if GE Capital had been a stand-alone bank going into this crisis, the government would almost certainly have plowed Troubled Asset Relief Program dollars into it already.

GE.

Unemployment in the United States:

Quote:

In the week ending Feb. 28, the advance figure for seasonally adjusted initial claims was 639,000, a decrease of 31,000 from the previous week's revised figure of 670,000. The 4-week moving average was 641,750, an increase of 2,000 from the previous week's revised average of 639,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending Feb. 21 was 5,106,000, a decrease of 14,000 from the preceding week's revised level of 5,120,000. The 4-week moving average was 5,011,000, an increase of 76,750 from the preceding week's revised average of 4,934,250.

By Andy Xie, Caijing guest economist and board member of Rosetta Stone Advisors Limited
Policymakers around the world have not shown an understanding of the current crisis. It is the end of a two-decade long bubble. It is the end of the asset-based economy. It is the end of productivity dividends from IT revolution and globalization. Perhaps one tenth of the income in the global economy was from bubble activities and is permanently lost. The income will shift elsewhere. The resulting demand is different. The supply side has to change to meet a different mix of demand in the post bubble economy. If governments don’t understand, the world may suffer a lost decade ahead. No, it is not Japan in the 1990s. It is Japan of the 1990s plus inflation, i.e. stagflation.

Stock markets around the world have fallen close to or below the lows of November 2008. Concerns over bank bailout uncertainty and deepening recession drove the decline that reversed the 20 percent bounce from the lows of November 2008. The delays in releasing details by the U.S. Treasury on its bank bailout plan led to suspicions that it didn’t know what to do yet. The exposure of European banks to Eastern Europe caused concerns over their solvency. If big global banks remain mired in bad assets, credit system won’t function normally, and the global recession has no hope to end soon.

On the economic front, the news is grim: Japan’s GDP contracted by 3.3 percent, the euro zone by 1.5 percent, and the U.S. by 1 percent in the last quarter of 2008. The U.S. fared better because it piled up inventories, which could lead to a worse situation later. The global economy probably contracted by 2 percent in the last quarter of 2008 from the previous quarter, the worst decline since the World War II. The first quarter of 2009 won’t be better. January trade data for East Asian economies already casts a dark shadow over the quarter. All the data are portraying a global economy burgeoning on collapse.

...

Governments must understand the lasting nature of the current downturn. The bursting of the credit bubble triggered the fall. The mismatch between income and demand could delay a sustainable recovery for years. During the bubble era income distribution became more and more skewered towards asset-based activities. For example, the profit share of financial activities among U.S.-listed companies quadrupled. Similar trends happened in many countries. The income for the workers in finance increased in a similar fashion. The bulging income from the financial sector was quite concentrated among a small group that spent money in luxuries and financial investment. This is the most important factor for rising concentration of income distribution around the world in the past decade.

The bursting of the bubble will destroy most income in financial activities. The amount lost could be one tenth of GDP. From limo drivers to luxury homebuilders, the compounding effect from the financial meltdown will leave unemployment across many industries and countries. The recovery becomes sustainable only when supply side is restructured to cater to a different demand mix. This process could take a long time to complete. But governments might prolong the downturn by making the wrong decisions. For example, governments around the world are engaging in fiscal stimulus. To some extent they are choosing winners, but if the ventures they back are way off what market would support, the stimulus would delay recovery. Stimulus is necessary in a severe downturn like now. It just needs to match the structural changes to come.

Let us think through the problem facing an unemployed banker and his ex-driver. The banker could splurge and hire a driver since he was making 20 times his driver’s wage. Of course, in addition, he was paying for his florist, tailor, maid, masseur, etc. On average, he spent 70 percent of his income on the equivalent of 15 people like his driver full time serving him and put 30 percent back in financial investment like in a hedge fund. Now, the ex-banker moves to Kansas City and becomes a high school teacher. His current income is the same as his ex-driver’s. He drives to work, cleans his own house, and forgoes massage. The economic problem is what happens next to the fifteen people who were serving him.

The banker’s income before came from asset market activities, essentially redistributing income to himself by manipulating asset prices. As he stops doing that, the cost for economic activities goes down by the amount equal to his income. But the people serving him have lost their income. The net result is that the economy contracts by the same amount as the banker’s income plus 15 unemployed people. In addition, the 15 unemployed people can’t spend. The multiplier effect magnifies the banker’s income contraction, possibly by a factor of two. The world looks worse off with a smaller economy and more unemployed.
When the government steps in to stimulate, it is essentially borrowing the equivalent of banker’s ex-income to spend. The purpose is to keep the 15 people employed. However, the government won’t spend on drivers, nannies or florists. The mismatch means the government can’t get the economy back with stimulus. It shouldn’t. The driver must find new customers. The banker is gone for good. What the government should try to do is stop the multiplier effect from the 15 people that the banker no longer hires. If these 15 people get unemployment, it could go a long way to mitigate the multiplier effect. The economy can come back when it is restructured so that the 15 people find new employment.

The world will eventually be better off. The banker was just redistributing income to himself. The money would lead to more productivity if it could be directed to more productive people. It’s just that the process of adjustment could be long. The world has experienced an asset-based economy for two decades. It has led to extreme income distribution. In the last few years, large manufacturing companies like GE and GM came to depend on financial activities for profits. Their industrial activities were really used as a fund raising platform. In China manufacturing companies depended on property development or stock market speculation for profits. The profit margins from their main businesses kept dwindling. Reversing the trend of the past two decades would take a long time. If governments don’t understand and try to bring back the ‘good times’ of the past, it will prolong the adjustment, and the world may suffer a lost decade.

The immediate task is to repair the banking system, especially in the U.S. The U.S. Treasury is promising overwhelming force now and details later. This may be a stalling tactic. The prices of big bank stocks and toxic assets already assume nationalization. The U.S. government is right to be concerned of the permanent damage to its financial system from nationalization. But to avoid it, the government has to grossly overvalue toxic assets. The U.S. taxpayers wouldn’t agree to throw taxpayers money at failed banks. If the U.S. doesn’t fix its banking system, the US$ 780 billion fiscal stimulus will be wasted.
The right approach is to nationalize these banks, separate the toxic assets into a different entity, and relist the healthy halves. The proceeds from selling down the healthy banks could be used to pay for absorbing the losses from disposing toxic assets. This is what China did to repair its banking system. It may be the only way out for the U.S.

Second, the West must contain the cost of its entitlement programs, beginning with healthcare in the U.S. If the U.S. doesn’t institute radical reforms to contain its healthcare cost, it will go bankrupt, possibly within a decade. If Europe doesn’t reform its pension and unemployment benefits, it will have to raise taxes or run bigger budget deficits permanently, and its economy would stagnate.

The biggest economic challenge among developed economies is aging, which leads to escalating pension cost and exponentially rising healthcare cost. While the wrong policies allowed the credit bubble to happen, the desire to defend an old lifestyle while social overhead grows higher was a major contributing factor. It allowed the western economies to delay the hard choices. The current system was set when aging was not a big challenge. The only viable course forward is to increase the retirement age and ration healthcare access.
Third, emerging economies must decrease export dependency. Export-led development usually reflects weaknesses in the political economy – the inability to efficiently turn savings into investment. The causes are usually lack of the rule of law and income and wealth concentration. Export orientation is to import the global system. From Japan a century ago to the Asian Tiger economies fifty years ago and China thirty years ago, the model has made fast development possible.

The problem with the model today is that it is crowded. Developing economies are already 30 percent of the global economy at current price and nearly half on a purchasing power basis. The export model cannot thrive for shortage of customers. Developing countries have to trade more with each other and develop domestic demand. But this would require painful reforms to their political economies. The key is property rights and income distribution. The two must go hand in hand. Lack of domestic demand tends to result from income concentration, which is due to uneven playing field in opportunities. Many developing countries, like South American and Southeast Asian countries, have stagnated in the past decade due to their inability to reform their political economies.

Bursting of the credit bubble is triggering the biggest recession since the World War II. Repairing the global economy requires complex and difficult reforms. Simple stimulus can’t bring back prosperity. While stock markets may improve in the second and third quarter, it is merely a bear market rally. When inflation concerns hit the market towards the end of 2009, stock markets could fall sharply again. Indeed, the ultimate bottom in the current cycle could happen in 2010.

CHICAGO (MarketWatch) -- Mortgage delinquencies took their biggest quarterly jump on record in the fourth quarter of 2008, hitting a record 7.88% of loans outstanding, the Mortgage Bankers Association said Thursday. The delinquency rate, which includes loans that are at least one payment past due but not yet in foreclosure, was up from 6.99% in the third quarter and from 5.82% a year earlier. The rate of new foreclosures was up slightly to 1.08%, putting 3.30% of mortgages somewhere in the foreclosure process. The combined percent of loans past due and in foreclosure jumped to a seasonally adjusted 11.18%, the highest since the MBA began keeping records in 1972.

Let's put this in the proper perspective.

Normal default rates for prime mortgage paper is well under 1%, even in difficult economic times.

This is how it was deemed "safe" for firms like Fannie and Freddie to lever up at 80:1; a 1.x% default rate bankrupts you, but if that's not going to happen, the greater leverage means greater profits.

So how did we wind up with a failure rate of ten times the norm spread across the entirety of all outstanding mortgages?

Remember, this is far worse than it looks. The median "holding time" for a home loan is around 7 years, so this means that about half of the mortgages written were done before the boom occurred; those are presumed safe, as there is sufficient equity that even if you lost your job you can sell for more than the outstanding balance on the note.

So this means that approximately one in five mortgages written in the last seven years are either not being paid or in foreclosure.

ONE IN FIVE!

That is twenty times the normal rate.

This can only happen through massive, pervasive fraud up and down the line. This gross mismatch between expectations and historical norms and actual performance means that nobody holding this paper is safe under any definition you care to use. With 1 out of 5 notes going back and average recovery (per HUD) being around 50 cents at best, you're talking about losses of ten percent of the total amount financed over the last seven years!

These are absolutely colossal numbers and there is no possible way for the government to backstop or "print" its way out of it. It cannot be done and if our government doesn't cut their crap out the market, which has sussed out the truth, is going to continue to pummel everyone who has any sort of debt, presuming that all debt was underwritten with similarly crappy documentation and performance characteristics.

Thus you have GE getting pounded into the dirt, you have Wells Fargo down near $8 a share, you have JP Morgan trading under $20 and Citibank shares being literally the price of a lottery ticket each ($1.04 as I write this), with Bank of America being a bit over three lotto tickets.

There will be no stopping this process of destruction until lawmakers and policymakers force the liars who are holding this paper at 90 cents in "Level 3" buckets where nobody knows what they have and how its valued to tell the truth.

If this bankrupts those firms, then it does. There is nothing that can be done about it. The total losses here in residential Real Estate alone are going to hit $3 trillion.

...

It is not possible to "support" this folks. Mathematically impossible.

Government must force the fraudsters out into the open and lock them up.

MUST.

If it does not all of these losses will be multiplied into the market caps of every company carrying debt in the marketplace with their equity prices ground into the pavement - face first.

As I have repeatedly noted this will detonate every pension fund in the United States and ultimately destroy the US Treasury market as well due to their futile attempts to issue north of $5 trillion in new debt with a market that will look toward The Fed and Treasury as the new bagholder of all that toxic debt.

It isn't going to work folks - again - the math is never wrong.

The longer we have to wait before the government does the right thing the worse the damage to our economy and financial system will be. All we are doing at this point is compounding damage into firms that didn't lie along with those that did, increasing unemployment beyond where it would otherwise go and destroying many more trillions of equity value than is otherwise necessary.

Enjoy the market crash that Washington DC is serving up upon you.

They, and you, were warned two years ago and both they (and you) decided to play "happy face" instead of locking up these liars and thieves then.

We still can (and must) do the locking up if we wish to avoid an all-on economic collapse. A Depression is no longer part of the negotiating process; at least a mild version of that appears to be assured.

Stocks are ending at 12-year lows, more than wiping out a one-day rally. Investors are contending with more disheartening economic readings, new concerns about the stability of GM and ongoing uncertainty about the financial system.

According to preliminary calculations, the Dow Jones industrial average is down 281 points at 6,594.

The S&P 500 is down 30 at 682, while the Nasdaq composite index is down 54 at 1,299.

About 10 stocks fell for every one that rose on the New York Stock Exchange. Volume was a heavy 1.8 billion shares.

Not to troll out or rain on the optimists parade, it is a serious depression like no other. Well, this thread is about the depression; not recession so we'll talk depression instead of being falsely optimistic in trying to call it a recession that'll blow over. The fat cats have been lying out their teeth for way too long. It's time they're held accountable, but that's not happening as they're just being handed more money on a silver platter.

We have nothing in recorded modern history to relate our situation today with. We might think about the great crash of 1929 and the 1930's, but even that is very different than today. Today's situation is so complex and it appears to have 30 years or much longer in the making. At least since the Reagan years, things have been set in motion for this huge failure. Some say it started in 1913 when taxation began in the US, but it appears the 1980's Reagenomics really set things in motion. The republicans, the upper class, promoted unsustainable processes in the economy such as issueing lots of debt and dishing up so few good jobs due to offshoring and downsizing with most only offering stagnated low pay, few incentives, and little if any upward mobility. People have to be able to have access to adequate appropriate employment, housing, transportation, and healthcare in a healthy community or it just all goes to hell in a handbasket.

What needs to happen is not happening. The American economy is in a state of cardiac arrest with the government feeding it the wrong pills to correct the situation. Instead of economic stimulus packages feeding the fat cats who misled, reinvest in the people's livelyhoods and police the fat cats. Clamp down hard on them when they commit fraud, waste, and abuse. We need a complete country system overhaul and clean up of all the scumbags running things such as the CEO's. Maybe even enact some protectionist economic policies like Asian countries all do to protect their jobs and domestic interests.

If this is a depression then why is there a shortage of foerign teachers? Korean schools and parents have an insatiable appetite and yet the supposedly unemployed masses of university graduates are not showing up on these shores.

If this is a depression then why is there a shortage of foerign teachers? Korean schools and parents have an insatiable appetite and yet the supposedly unemployed masses of university graduates are not showing up on these shores.

Great post; good questions.

Korean schools and parents have an insatiable appetite and yet the supposedly unemployed masses of university graduates are not showing up on these shores. The effects of global economic downturn hasn't hit home in Korea like it has for Western countries and even other Asian countries such as Taiwan, but when it does hit home, it will be a sudden last minute panic button pressed and Korean budgets of all sorts will contract over night. Korea is a very proud nation holding out on admitting any serious setback or problem as it's trying to maintain good image. Thumbs up to them taking this much pride to maintain face.
Why is there a shortage of foreign teachers? Many don't know about this opportunity while many who do are not risk taking enough to get on a plane to go live in a foreign country for 1 year or longer. Many people feel too insecure about leaving the place they call home and couldn't picture exposing themselves to the unknown without being able to easily go home on weekends and holidays. This is not for most people and is definitely something only a tiny % actually do. If you now that Robert Frost literary piece, "The Road Not Taken," this job is all about that.

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.

If this is a depression then why is there a shortage of foerign teachers? Korean schools and parents have an insatiable appetite and yet the supposedly unemployed masses of university graduates are not showing up on these shores.

The ROK's economy has only begun to melt down. America has been in a recession since November, 2007, according to NBER. The supply chain lag smacked Korea this past Dec/Jan. Korea will get very messy, quickly.

We just hit another milestone. The market has now fallen farther faster than it did during the Great Crash of 1929-1932.

Floyd Norris, NYT:
It has been 513 calendar days since the stock market peaked on Oct. 9, 2007. Since then, the S.&P. 500 is down 56 percent and the Dow is off 53 percent.

On Jan. 29, 1931 — the identical number of days after the 1929 market peak — the S.&P. 500 was down 49 percent and the Dow was down 56 percent. The 1929 crash got off to a much faster start, but we have now more or less caught up.

In a survey of major Chinese economists, more than two-thirds are reportedly bearish on the prospect of China increasing its holdings of US government bonds, and believe instead the nation should putting more of its hard-earned into gold.

According to a China Business News survey of 70 Chinese economists (including one foreign economist), the exact figure is 71.4% anti-bonds and pro-gold.

The use of China's huge foreign exchange reserve is a topic of concern and controversy. The remaining 28.6% of those polled believe China should continue to buy U.S. Treasury bonds. 38.6% think that China should not continue to buy, but also should not to sell US bonds. 32.8% believe that China should unload the bonds, 22.8% of whom think we should have a slight sell-off, while 10% think China should drop them like a bad habit.

All this is against a backdrop of China surpassing Japan to become America's largest US bond holder and of the ever-widening global financial kerfuffle.

The survey also brings to light the question of whether China’s gold reserves should be increased. Recent gold futures prices broke through US$1000/ounce, making gold the most outstanding asset in the financial turmoil. One economist thinks China’s current gold reserve of 600 tons is an unnecessary load and that the opportunity should be grasped to sell off a bunch of it at a good price.

21.4% of economists said that the gold reserve level was fine and leave it alone.

But 75.7% of the economists asked believe that China should increase its holdings of gold, with 48.6% opting for a slight increase while 27.1% think China should pile in.

Commodity Online
NEW DELHI: Central banks in countries like India and China may soon go for gold instead of dollar as their reserve.

China, the biggest foreign holder of dollar denominated treasury securities with some $681.9bn or about 12 per cent of treasury papers outstanding, may soon dump Uncle Sam’s currency for gold as it believes that dollar may nosedive following the bailout packages.

This is the new trend among the major emerging economies.

In India also, accumulation of foreign exchange reserves has been increasing in recent years. The country’s primary sources of foreign exchange reserves have been capital flows and portfolio inflows. While the share of gold in total foreign exchange reserves is very high in United States and European countries, the share is comparatively lower in Asian countries.

The question that arises is whether India should add more gold to its composition of foreign exchange reserves. In the present scenario, emerging market economies have started accumulating foreign exchange reserves on an unprecedented scale.

These economies have accumulated reserves at an annual rate of $250 billion during the period 2000-2005. High foreign exchange reserves are often seen as a strength indicating the backing a currency has.

On the other side of the coin, holding of huge foreign exchange reserves also indicates the lack of confidence on the global financial architecture. Gold does not earn any interest, other than the return that it fetches if lent. This is in fact the primary reason why central banks in many countries decided to reduce their gold holdings. The gold’s share of reserves was above 10 per cent in 2006. This is mainly because of the sharp rise in the price of gold.

For a country that follows a fixed exchange rate regime, foreign exchange reserve has an important function. In order to keep the currency exchange rate fixed, the central bank of the country has to trade in the currency market to balance demand and supply.

But for countries that follow floating exchange rate, the need for maintaining foreign exchange reserves is a question that has remained unanswered. If the foreign exchange reserves maintained by a country are not adequate, then investors may get speculative on the currency and affect its pricing.

The three components of India’s foreign exchange reserves are gold, special drawing rights and foreign currency assets. India is constantly accumulating its foreign exchange reserves to meet the requirements of its increasing current account deficit and to protect against volatile capital flows. In this process, it is felt that India seems to hold foreign exchange reserves very much in excess.

With the growth of the domestic industry and higher oil prices in international markets, the current account deficit is expected to widen in the coming years. This implies that the country would require more foreign exchange reserves to manage the foreign exchange demand that will arise from current account transactions.

Investors have been piling into gold as a safe haven as the world’s worst financial crisis since the 1930s depression sent global stock markets crashing.

China has $2 trillion of reserves, and only one per cent in gold and nearly all of the rest is in US dollars. European central banks, which hold about half of global gold reserves, saw gold sales fall to their lowest levels since 1999.

The dollar hit a three-year high against a basket of six major currencies this week, with news that the US government would pour a further $30bn into troubled insurer AIG hastening risk-averse flows. The dollar index hit 88.822 — its highest since April 2006.

Bit, that is a temporary phenomenon. Looking at the size of the bailout packages in North America the fact that the US economy may well enter a depression .

Such a decline would apply pressure on Gulf Arab states which have faced popular pressure to ditch their currencies link to the greenback and switch to fight imported inflation when the dollar was weak.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

The US may not be able to finance the deficit in the very near future through the bond market.

March 6 (Bloomberg) -- Bank of England Governor Mervyn King, criticized for his initial response to the credit crisis, is now embarking on one of the biggest risks in British economic history.

The central bank yesterday won authority to print as much as 150 billion pounds ($212 billion) and pump it into an economy facing its worst recession since World War II, after cutting interest rates close to zero. With markets clogged and economic activity shriveling, King can’t be sure the gamble will work.

“We’re groping in the dark,” said Willem Buiter, a former Bank of England policy maker and now a professor at the London School of Economics. “Ultimately, we’ll know it works if the economy turns around, and that we won’t know for a couple of years.”

The risk for King is that the strategy fails, forcing him to create yet more money, or it backfires and fuels inflation. While U.K. officials are at pains to deny similarities with the economic policies of Robert Mugabe’s Zimbabwe, where printing money has fueled hyperinflation, some economists argue that the Bank of England hasn’t much of a choice left.

“You have to ask what it would be like if they weren’t doing anything and I suspect a lot worse,” said Amit Kara, an economist at UBS AG in London. “But the whole banking system has yet to be fixed, the economy has yet to deliver and credit is not available. It’s all a shot in the dark.”

“We don’t know whether quantitative easing works or not, but it’s a good thing to try,” said Christopher Allsopp, a former U.K. policy maker. “The amount looks serious, and it needs to be to make sure it has a chance of working. They’re doing what they can.”

Printing money has become linked with economic mismanagement. In the 1920s, the German government fueled inflation to fund World War I loan repayments and reparations, eroding the authority of the Weimar Republic. Mugabe’s monetary policy has left Zimbabwe with the world’s fastest inflation, last estimated at 231 million percent in July 2008.

‘Lost Decade’

Quantitative easing was also tried in Japan in the 1990s, where authorities struggled to stimulate the economy in what became known as the country’s “Lost Decade.”

King himself has noted how it’s all too easy for central bankers to let prices slip out of control once they start printing money.

“Zimbabwe has determined very clearly that if you want a higher inflation rate you could have it,” he told reporters in August 2007.

Great articles misses, thanks. I have been expecting the dollar to lose value since 2007. I did not expect this temporary increase in value and even after it happened I did not expect it to last this long.

My question at this point is what happens to the Won after the dollars value starts to fall. Does it remain in parity with the Dollar as it declines or does it uncouple and the pendulum swings the other way. Is it possible to see 700, 600, even 500 Won to the dollar after it crashes.

I ask this not hoping that it will happen. I would much rather have a 1500 exchange rate than a 500 exchange rate, as the latter would be much more detrimental to the Korean economy as a whole than the current export friendly weak Won.

So what happens after the crash of the dollar for those of us that are smart enough to stay on a leaking boat rather than running back to a sinking one?

But I do not believe the US is at risk of inflation in the near to medium run. The amount of capital destruction is awesome and even trillions dumped in the economy would not plug balance sheets. And I think we've been looking at monetary policy and inflation incorrectly (and I did my masters thesis on monetary policy...which means my thesis is based upon incorrect economic assumptions). This is what I assumed before:

Quote:

The conventional model: the “Money Multiplier”

Every macroeconomics textbook has an explanation of how credit money is created by the system of fractional banking that goes something like this:

* Banks are required to retain a certain percentage of any deposit as a reserve, known as the “reserve requirement”; for simplicity, let’s say this fraction is 10%.
* When customer Sue deposits say 100 newly printed government $10 notes at her bank, it is then obliged to hang on to ten of them—or $100—but it is allowed to lend out the rest.
* The bank then lends $900 to its customer Fred, who then deposits it in his bank—which is now required to hang on to 9 of the bills—or $90—and can lend out the rest. It then lends $810 to its customer Kim.
* Kim then deposits this $810 in her bank. It keeps $81 of the deposit, and lends the remaining $729 to its customer Kevin.
* And on this iterative process goes.
* Over time, a total of $10,000 in money is created—consisting of the original $1,000 injection of government money plus $9,000 in credit money—as well as $9,000 in total debts. The following table illustrates this, on the assumption that the time lag between a bank receiving a new deposit, making a loan, and the recipient of the loan depositing them in other banks is a mere one week.

However, from the point of view of the empirical record, and the rival theory of endogenous money, this will fail on at least four fronts:

1. Banks won’t create more credit money as a result of the injections of Base Money. Instead, inactive reserves will rise;

2. Creating more credit money requires a matching increase in debt—even if the money multiplier model were correct, what would the odds be of the private sector taking on an additional US$7 trillion in debt in addition to the current US$42 trillion it already owes?;

3. Deflation will continue because the motive force behind it will still be there—distress selling by retailers and wholesalers who are desperately trying to avoid going bankrupt; and

4. The macroeconomic process of deleveraging will reduce real demand no matter what is done, as Microsoft CEO Steve Ballmer recently noted: “We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy”.[9]

The only way that Bernanke’s “printing press example” would work to cause inflation in our current debt-laden would be if simply Zimbabwean levels of money were printed—so that fiat money could substantially repay outstanding debt and effectively supplant credit-based money.

Measured on this scale, Bernanke’s increase in Base Money goes from being heroic to trivial. Not only does the scale of credit-created money greatly exceed government-created money, but debt in turn greatly exceeds even the broadest measure of the money stock—the M3 series that the Fed some years ago decided to discontinue.

In a stark measure of the recession’s toll, the Bureau of Labor Statistics reported on Friday that the national unemployment rate surged to 8.1 percent last month, its highest in 25 years. The economy has now shed more than 4.4 million jobs since the recession started in December 2007.

The closest thing to good news:

Quote:

Although the tally of February’s losses was grim, the 651,000 jobs lost last month were actually fewer than the number in each of the last two months, according to revisions reported Friday.